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Most people shy away from the idea of investing in the stock market mainly because they do not understand how the market works. Others think trading in shares is only for sophisticated investors. Well, let’s make you a sophisticated investor today; it's a lot simpler than it appears.
In Kenya, the Nairobi Securities Exchange (NSE) is where investors trade in stocks. Consider the NSE as a big market where buyers and sellers virtually meet to trade. To begin trading you need to contact a stockbroker (a professional who will execute buy and sell orders for stocks on your behalf), and set up a Central Depository System (CDS) account which is free to open.
Just like a bank account where you keep your money, this account will be where your shares are held. In the past, shareholders used to be issued with physical certificates but nowadays that’s no longer the case. To open a CDS account, one requires 2 passport photos and a copy of your identity card or passport. Unlike a bank account, you can only open one CDS account. You can buy and sell shares between Monday and Friday from 9 am to 3 pm Kenyan time, excluding holidays. The minimum number of shares you can buy or sell is 100.
Once you have bought shares from a company, you become one of its shareholders. You will be invited to the company’s annual shareholder meetings, most of which are held around June; attendance is free. You will be issued with the company’s annual financial statements, a breakdown of how it performed and its plans for the future. This will give you a clear sense of where the company is headed. Most listed companies in Kenya announce their dividends in the first half of the year.
As an investor, there are some key terms you need to be conversant with:
Dividend payouts: When it comes to trading in shares, one of the key gains to be made is dividend payouts. Dividends are paid out when a company makes a profit and shares that profit with the shareholders of its stock.
Dividend investing: This is where you invest in stocks solely because those particular stocks pay out huge dividends. In Kenya stocks that pay huge dividends include British American Tobacco (BAT), in February 2020, BAT announced a dividend payout of 33.50 shillings per share. This means that if you owned 1,000 shares of the stock you would get a dividend of 33,500 which will be subjected to a 2% brokerage commission leaving you with a cool 32,830.
Stock appreciation: When your stock appreciates in price up to a certain point, you can decide to sell and make a profit. Let’s imagine you have 1,000 shares that you bought at Kshs 2 each, and after some time it trades at Kshs 10, you can decide to sell and make a profit of Kshs 7,600.
This is how it works:
Buy 1000 shares*Kshs 2= Kshs 2,000 plus broker’s fee (2%*2000= Kshs 20), total buying price is Kshs 2,020.
Then sell at 1,000 shares at Kshs 10
1000 shares*Kshs 10=Kshs 10,000, plus broker’s fee (2%*10,000= Kshs200), total selling price is 9,800.
Profit: 9,800-2,200 = 7,600
Now if an investor had 10,000 shares of this stock, they would make Kshs 76,000 just by selling off their shares.
On the day ending 7th July 2020, CIC insurance had its stock trading at Kshs 2.25 a share. This means that if you were to buy the minimum number of shares of this stock this is how much it would cost you: 100 shares *2.25= Kshs 225. Broker’s commission of 2% *225= Kshs 4.5. So to buy 100 shares of CIC insurance you would need 225+4.50 = Kshs 229.5 which rounds off to Kshs 230.
In other words, with Kshs 230, you can start investing in stocks. Undoubtedly, trading shares is a great way of owning passive investments.
Share splitting
In some cases, a company might decide to do a share split instead of issuing dividends. For instance, for every 1 share you own you get 2 or more shares. In 2019, Kenya RE issued 3 shares for every 1 share held by its stockholders. The benefit of this happening is if in the next few years the company decides to increase its dividend payout you end up accruing extra dividends for shares that you actually did not purchase. In the example above of BAT, let’s assume you owned 1,000 shares and the firm announces an allotment of three shares for every one held. This means you end up with 4,000 shares. If the following year they pay out a dividend of Kshs 33.50 per share, you go home with Kshs 131,320 after the broker deducts their commission. Share splits do not happen often though.
Deciding which stock to purchase
In deciding what stock to purchase, consider how the company performs in its industry. If you are considering buying a banking stock, compare how the bank is performing relative to other banks in the banking industry. Stockbrokers produce weekly reports on recommendations of stocks to purchase. These reports are detailed and provide valuable insights into the stocks under review for that week. Genghis Capital, for instance, has an annual report dubbed “The Playbook” that gives an annual outlook on stocks.
If you are focused on earning dividends, you could look at the history of the company and its dividend payout over the past years. Select an industry that interests you and pick stocks within it you could purchase. Zero in on companies that are performing well. Develop a diversified investment portfolio by investing in different sectors to spread out your risk and minimize losses in case the market takes a dip.
If you choose the direction of long term investing, and you have set your eyes on a particular stock, you might decide to purchase 100 shares of the stock every month, and incrementally increase your shareholding every month.
Potential risks
The downside to owning shares include an erosion of the share price due to poor performance by the company. While the investor has no control over decisions the management makes, it’s imperative that one does not wait until the share value of their stock completely goes down. Stock prices could go down to a number of reasons including government regulation, poor management and change in customer tastes and preferences for the products or services that the company sells. All this could lead to a decline in profits and, eventually, the share price. This is where keeping abreast with the news comes in handy, while also understanding the direction the firm is going.
Next time you have a spare 500 shillings to spare before you spend it on something frivolous, think about how many shares you could purchase with that amount.
There is a famous saying that goes: "The best time to invest was yesterday. The next best time is today". And as you can see, starting is not as complicated as you might have thought. So seize this moment and start today.
Some available resources
The CMA: As an investor, it would be important to visit the Capital Markets Authority website. This is the government body that regulates all the firms operating in this industry. In 2019, they ran a public awareness campaign where participants could win 5,000 and above to invest in the stock market. Keep an eye on their public education campaigns on their website.
Trading on the go: Some stockbrokers have mobile applications which you can use to trade shares on the go. Visit any stockbroker and they will provide you with information at no cost.
Banks: Some banks have an internal department that deals in shares. For instance, KCB bank has KCB Capital and NCBA bank has NCBA Investment Bank that handles the trading of shares. If you have a bank account with these banks you could open a CDS account with them at no charge, and start trading. Check with your bank if they have such a department.
The NSE: The NSE has public information sessions where they engage the public on how to buy and sell shares. The prices of all the listed firms are on the website of the NSE, www.nse.co.ke. The website shows daily figures of how the companies are trading.
*Disclaimer: This article only serves to create awareness and does not endorse the purchase of any particular stock or use of any specific stockbroker. Figures used are actual amounts as reported by the mentioned firms in this article.
Also read: Little Bets: Simple Investments You Can Make to Start Building Wealth in Kenya
